Regardless, primary spreads continue riding along the tight end of the spectrum, but recent new issues have softened in secondary trading, perhaps signaling the market mood ahead.

Structured products have experienced little spread tiering over the course of the year, and some analysts believe that narrow margins will continue over the next few months. "We believe that the market remains in relatively firm shape, despite some signs of weariness," reported analysts at the Royal Bank of Scotland. "Off-the-run deals remain well-subscribed [and there remains] continued strong interest in subordinated and junior tranches on both liquid and off-the-run deals."

The market will see sustained activity from the over 10 billion (US$12 billion) of redemptions expected in the next few months, noted RBS, which will likely keep the flow consistent.

Recent trading levels indicate that demand for sterling-denominated RMBS seniors have weakened, analysts at Dresdner Kleinwort Wasserstein said in research.

Sterling tranches have met some resistance in secondary trading driven by the constrained funding costs experienced by some sterling investors. "We expect sterling spreads to remain somewhat softer in the near term, " said analysts at the bank. "However, in terms of supply, the (public) pipeline for June does not look too heavy. At about 15 billion (excluding 3 billion that have already been launched) through 12 deals, the current volume is very much in line with the historical average, and, although we expect a few more deals to surface, the market should be able to digest this overall volume."

Market reports indicate that approximately 12.5 billion (US$15 billion) has been issued from the end of May to the beginning of this month, rounding up the year-to-date volume to 104 billion (US$125.8 billion), about 29 billion (US$35.10 billion) above last year's volume recorded at the same period. RMBS has accounted for the majority of the volume. Sources said that at least four large-scale Dutch deals are still slated to hit before the end of June.

A new Dutch Central Bank solvency regulation implemented earlier this year has corked up an otherwise extensive pipeline seen out of the Netherlands. Under the new regulations, banks are required to build up capital if they intend to repurchase the mortgage pool backing a transaction to exercise the call, beginning five years prior to maturity date.

"The effective maturity is set as the first possible date on which an SPE (the issuer) can exercise an option to end a transaction if the structure also includes incentives, which make this an attractive option for the originating bank. In most cases, this date should coincide with the coupon step-up date," explained analysts at DKW. "If the originating bank does not build up the capital, it will not be allowed to repurchase the mortgage loans. Instead, early redemption would rely solely on whether a funding alternative, e.g. via a new securitization deal, can be found."

Analysts added that many of the banks are likely to assume that they can refinance a transaction, as opposed to building up capital. This would, however, leave investors exposed to the refinancing/extension risk.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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